1099 Benefits: Compromise in the Gig Economy
April 03, 2018
Leo drives a mid-2000s Acura TSX and arrives at the pickup point in front of a train station in Trenton, New Jersey. I’m headed home from New York City for the Thanksgiving holiday. Leo gives me a hand with my suitcase, and in under a minute, we’re off, driving Interstate 276 West most of the way there. The 26.66 mile trip takes 45 minutes. It costs me $34.68 on one of the most popular rideshare platforms, of which Leo receives about $25, minus the cost of gas, tolls, and vehicle mileage. Leo is a pretty talkative guy, and the subject turns to the various driving platforms, like Uber and Lyft. Leo is a young guy, and he tells me he’s one of the approximately 1 in 4 drivers who does not have health insurance.
He tells me that he fears getting sick and not being able to pay bills, and that the health insurance available through Aon, a partner company, is too expensive for most people who drive for a significant part of their income. He does not have much saved for retirement or a rainy day. I ask him if he likes driving. He tells me he enjoys it, he likes the money and the flexibility of his hours, but wishes he were working full time in a “real job.” I asked him if he feels like an employee. He replied, “I don’t know what that even means anymore.” It seems he’s not alone.
Improving Financial Security with Portable Benefits
Workers on gig economy platforms like Uber and Lyft lack many of the benefits and protections of traditional (W-2) employment, a reality that jeopardizes the financial wellbeing of those workers and their families. Right now, options in improving workers lives are limited.
Judges can maintain the status quo and leave workers at financial risk or declare drivers and other gig workers W-2 employees, changing the business model of many of these companies dramatically, and making it harder for those who work on these platforms for a little money on the side.  These competing interests offer the promise of compromise: less thorough but more flexible benefits than those of traditional employment, a scheme that reflects the importance of workers and platforms alike. Prompted by a tsunami of litigation on behalf of workers, gig platforms and legislators have begun to seriously consider a new policy tool: portable benefits. Portable benefits work by charging a per-service fee on gig economy transactions, which then accrue into an account that can be shared across one or more employers, and cashed in for benefits like health insurance and sick leave. The concept of portable benefits has been supported, in broad strokes, by union leaders, gig economy employers, and other interest groups. 
The Changing Domestic Labor Market
Employment growth in the decade of 2005-2015 showed fundamental changes in the labor market. Shifts from traditional employment to temporary and contract work have been sweeping: researchers found “that 94% of net job growth in the past decade was in the alternative work category… and over 60% was due to the [the rise] of independent contractors, freelancers and contract company workers.” In 2010, workers who engaged in freelance, contract, or contingent work full-time made up about 8% of the labor force.  In 2015, the fraction of the workforce engaged in this “alternative work category” has risen to 15.8% or nearly one in every six workers.  Meanwhile, in 2016, union membership hit an all-time low, a figure that has been steadily declining since the Bureau of Labor Statistics began tracking it in the 1980s.
The gig economy includes known tech companies like Uber and Lyft, as well as other large companies like Postmates (food delivery), Handy (home cleaning), and TaskRabbit (odd jobs). Importantly, the gig economy is not a tech-only phenomenon. From transcriptionists to janitors, a greater portion of work in America is performed by independent contractors, a shift that critics claim has eroded important labor protections on questionable legal justification but faced little public scrutiny. [
Existing Treatment of Gig Economy Workers
Gig economy workers are typically classified as independent contractors, which the Internal Revenue Service treats as “pass-through” small businesses. They file their taxes with the IRS on a form called 1099, hence the name “the 1099 economy,” and are liable for both the employer and employee portion of the Federal Insurance Contribution Act taxes (FICA), while a traditionally employed person would only pay the employee half of those contributions to Medicare and Social Security.
In addition, 1099 contractors do not receive any of the benefits of most traditional employees: access to group health insurance, workers compensation, paid sick leave, 401(k) matching, or even a guaranteed minimum wage. While half of Uber drivers get health insurance from another job or a family member, and 77% of platform earners are covered by some type of health insurance like Medicaid or Medicare, drivers are still covered at rates 10 points lower than the national average.  Paying for vehicle maintenance and gas out of pocket adds to the financial risk of working in ride sharing or food delivery. These factors combined make it evident that the gig economy has real economic costs to its drivers, costs that might not be immediately evident and do a poor job at protecting workers from overseen economic shocks.
Jobs Worth Saving
Emblematic of the broader gig economy, Uber provides a substantive earning opportunity for drivers, despite its controversial business practices. The vast majority of drivers do not drive full time, and over half drive 0-15 hours each week. While Uber cites an average wage of about $19/hour, the real figure less gas and tolls is closer to $13, still above the average hourly wage of a cab driver.  Uber has 600,000 drivers on their platform in the US.  There are more Uber drivers over 50 then under 30, and retirees represent a significant portion of drivers on the platform. Throughout the gig economy a similar trend exists, where the median age of workers was 53 in 2014.  Rideshare platforms offer increased labor flexibility as well: the ability to add a few hours to pay a bill or deal with an unexpected expense. Only 38% of drivers calling Uber their full time job. That flexibility has made Uber a first stop job for everyone from working mothers to immigrants, and National Bureau of Economic Research data indicate the flexibility offered by the platform, “generates a large surplus of about 40 percent of their total expected pay, or more than $150 per week.”  Much of the job growth of the last ten years, and much of the of growth during the economic recovery, has been in the gig economy. The combination of demonstrable benefits to workers and the gig economy’s significant economic impact should give regulators pause.
The Lawsuit Avalanche
Uber drivers and other gig economy workers often do not resemble traditional freelancers, like graphic designers or piano teachers. Traditional contractors are paid by multiple clients, rather than by one facilitating platform. They are also in complete control of which services they provide and how much those services cost–rather than being assigned tasks, prices, and rated on their performance–and set their own prices for services. These obvious differences prompted a number of labor activists to sue for retroactive benefits and 1099 misclassification in California and New York and analogous misclassification in other jurisdictions such as the United Kingdom and the European Union.  Labor appears to be winning this fight.
While the flexibility of gig platforms makes them different from traditional employment, judges have largely sided with workers. The European Union just recently classified Uber as a taxi company, rather than a ridesharing platform, subjecting Uber to numerous regulations. In the United Kingdom, courts ruled that drivers must get “worker” benefits, like holiday leave and a minimum wage, an upgrade from drivers’ prior status as “contractors.”  These decisions point to a continued squeeze on gig company practices abroad.
Court cases stateside reflect a similar trend. After Uber proposed a $100 million settlement to settle claims of misclassification for California and Massachusetts drivers, a judge declared the amount insufficient.  In similar misclassification cases, Lyft successfully settled for $27million, and a California Labor Commission ruling in June 2015 ordered Uber to reimburse a driver for more than $4,000 in expenses incurred over eight weeks.  Doordash has settled its most recent misclassification suit for $5 million.  A New York State judge, Michelle Burrowes, declared Uber drivers as employees for the purposes of collecting unemployment insurance. She wrote in her decision, “The overriding evidence establishes that Uber exercised sufficient supervision, direction, and control over key aspects of the services rendered by claimants such that an employer-employee relationship was created.” These misclassification lawsuits have also crept up outside the tech economy; New York based exotic dancers and Lowes workers have also won misclassification suits against their employers. 
From companies’ perspectives, these lawsuits have been nauseatingly frequent. Uber is currently banned in London, its largest UK market.  Well-funded gig economy startup Homejoy was rumored to have shut its doors due to a barrage of 1099 lawsuits.  Another startup HomeHero cited the change from 1099 independent contractors to W-2 employees, due to changes in the Fair Labor Standards Act, as the reason for its demise.  It is clear misclassification lawsuits pose an existential risk to the tech-enabled gig economy, and policymakers must explore solutions that save jobs without putting workers at risk.
Labor activists claim it’s greed that motivates a company’s efforts to provide as few benefits as possible, but some legal experts argue that view is simplistic. Providing more benefits also introduces more legal risk. Alana Semuels of The Atlantic writes that “the platforms are skittish about providing real benefits to workers, because they worry that doing so will result in their being required to classify the workers as employees, rather than independent contractors, which would put them on the hook for more.” Other switches that could help workers, like assisting them in identifying their tax withholding obligations or calculating their expenses, are also likely to bolster labor activists’ case that Uber is really an employer. Most importantly, W-2 employees typically cost employers an additional 30% on top of wages, and for a company like Uber, whose 2017 red ink topped $3.2bn, that reclassification may just be the straw that breaks the business model-camel’s back.  More important than any one company’s bottom line is the simple truth that W-2 employment is a poor fit for many workers’ interests, as traditional payroll employment would end the on-off flexibility that makes rideshare and the broader gig economy so attractive. While no company should make its money off of flouting the law, converting gig workers to W-2 employees would end the gig economy as we know it.
The status quo is plainly untenable. Platforms need benefits that differentiate casual gig workers from those that use gig economy work as a full time job. Covering all, including the most casual workers would be inviable- government mandated benefits would far exceed modest revenues generated by such workers’ participation on platforms. Firms need ways to provide benefits that are proportional to how much those workers work. Portable benefits do just that. Because they’re not tied to any one platform, workers can switch between platforms (as they often do) or work varied hours.
In most states, independent contractors are exempt from mandatory workers compensation and unemployment insurance, benefits available for every W-2 employee. Portable benefits could start with funding these basic protections. If labor advocates like Sarah Horowitz of the Freelancers Union get their way, benefits like pensions, sick leave, and health insurance would be funded on a per-dollar-earned basis by the platforms themselves. Benefits would accrue to an account such that if one drives 10 hours for Lyft and 30 for Uber in a week, those companies would contribute ¼ and ¾ of the funds in that driver’s account.  Account funds could be cashed in for health insurance plans and paid sick days. In the absence of government intervention, the National Domestic Workers Alliance has modeled portable benefits with a service called Alia, which prompts clients to pay home cleaners $5/cleaning toward a benefits fund that can be used to purchase “paid sick leave disability, accident/illness and/or life insurance.” Google.org disbursed funds to Alia to help scale up its operations, and one of its affiliates received grant funding from the Department of Labor to improve its benefits tool. 
Portable benefits legislation would treat benefits like health care and retirement savings in a manner better consistent with new, flexible, work models.  Legislation would, in exchange for these contributions, end the risk of independent contractor misclassification lawsuits for flexible gig platforms. This shift will also free gig economy platforms to provide much needed assistance in tax preparation, expense tracking and healthcare. These laws are imperfect, and the details – whether benefits will be voluntary, what kind of bargaining power workers have, and whether workers will be guaranteed a minimum wage and paid leave – are open questions.  Portable benefits legislation remains an important first step, and clearer federal legislation and fewer lawsuits will provide much needed stability in the gig economy. Policymakers can increase workers’ financial security and wellbeing by developing portable benefits legislation.
Portable benefits gained their first national legislative attention this past year when Rep. Suzan DelBene and Senator Mark Warner introduced legislation allocating $20million at the Department of Labor for projects that would create and test new benefit models. That first step was supported by activist Sara Horowitz, founder and executive director of the 350,000+ member Freelancers Union, as well as gig economy mainstays Postmates and Lyft.
Several states have also introduced portable benefits legislation. In New York State, under proposed legislation, companies would voluntarily contribute 2.5% of the fee for each job performed by the worker. That money would be deposited into a benefits fund account, which workers would access to purchase benefits like health insurance and retirement. The same fund would be used for any company in the benefits network and would give discretion to the companies as to which benefits they would offer. The law would also codify that workers on these platforms are not, in fact, employees. Other legislation has been proposed in Washington, California, and New Jersey. In Washington State, State Representative Jessyn Farrell (D) introduced legislation that stipulates, “companies would be required to allot the lesser of 25 percent per customer transaction with a worker or $6 for every hour on the job to the benefits plan.” State Assemblyman Troy Singleton (D) of New Jersey introduced similar legislation in Trenton.
The conversation about portable benefits transcends the technology sector, prompting broader questions about the nature of work and labor protections in the 21st century. Old labor models are decaying: pensions, and union membership have been replaced with flexible but unstable “gig work,” in areas of the economy as diverse as telecom, retail, and transportation. This phenomenon serves a Rorschach test for how we see conflicts between business and labor: either the growth of gig jobs is a result of fundamentally changing economic conditions or a cheap workaround to avoid expensive labor protections. The result is likely somewhere in between, and good policy will acknowledge these dueling truths in a compromise that ensures both workers and platforms move forward with more certainty about what tomorrow will bring.
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The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.
 https://irs.princeton.edu/sites/irs/files/An Analysis of the Labor Market for Uber’s Driver-Partners in the United States 587.pdf